Dollar eases as investors price out 'Armageddon recession' risk

THE dollar eased on Thursday (Feb 16) as investors scooped up higher-risk currencies after a run of strong US economic data reinforced confidence in the global growth outlook, even though the Federal Reserve looks set to raise interest rates further.

Data from the US Commerce Department showed on Wednesday that US retail sales rebounded sharply in January after two straight monthly declines, driven by purchases of big-ticket items like motor vehicles and other goods.

That came just a day after US inflation figures showed consumer prices slowing, but still sticky. Data from earlier this month also showed that US job growth accelerated sharply in January, pointing to a resilient economy.

However, the question for market watchers is how well can the economy continue to hold up, especially as rates head much higher than many originally thought.

“The data is coming in strong and it is leading people to price out the ‘Armageddon-recession’ scenario that everyone was expecting at the start of the year, but I’m not sure one CPI and one retail sales print is enough for everyone to think all is fine and dandy with the economy once more,” TraderX strategist Michael Brown said.

“The logic is sound, but the flipside to that – to play devil’s advocate a little bit is: rates higher for longer, but can the economy withstand a 5.5 per cent rate for particularly long?“

The interest rate futures market, or curve, shows US rates could peak close to 5.25 per cent by July before dropping to 5.0 per cent by the end of the year.

“I would say if you look at the curve, that’s pricing 30-ish basis points of cuts between July and December. The curve is saying the economy wouldn’t be able to withstand that,” Brown said.

The US dollar index fell 0.1 per cent to 103.73, after touching a six-week high of 104.11 the previous day.

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Expectations for US monetary policy have shifted dramatically even since the start of the month. On Feb 1, markets were priced for a peak of 4.83 per cent by July, with a drop to 4.5 per cent by the year-end.

Evidence of economic strength undermined the dollar on Thursday, but it gave equities and commodities a lift.

“If we take a step back, the better-than-expected U.S. data should support the global growth picture. In addition, China’s reopening story has yet to fully play out and if data in the coming weeks starts to show a pick-up in activity, then this should bode well for global growth,” said Christopher Wong, a currency strategist at OCBC.

With the dollar on the back foot, the euro rose 0.2 per cent to US$1.07095, having hit six-week lows earlier in the week. That said, it is still more than 11 per cent above late September’s 20-year low.

Sterling rose 0.1 per cent to US$1.20465, after having lost more than 1 per cent on Wednesday.

British inflation slowed more than expected in January and there were signs that price pressures are cooling in parts of the economy, such as services, that the Bank of England (BoE) watches closely.

The BoE has already indicated that it may stop raising rates in March and Wednesday’s inflation data reinforced that view.

Meanwhile, the yen gained broadly, pushing the dollar down by 0.2 per cent to 133.91, and the euro down 0.1 per cent to 143.3. Yen traders are waiting for a speech by Kazuo Ueda, the nominee to become the Bank of Japan’s next governor, at a confirmation hearing at the lower house of parliament on Feb 24. REUTERS